Regional Economic Integration in Central and Eastern Europe and the Prospects for the Fifth Enlargement of the EU
I. Introduction
1. Background of the European Community (EC) and the European Union (EU)
As the 6 member states of the European Community (EC) such as Germany, France, Italy, the Netherlands, Belgium, Luxembourg signed on the Treaty of Rome in 1957, no member states could expect an emerging of the powerful European Union (EU). The EU became the largest economic market in the world. However, no nation paid to attention for the EC as the EC started. The reason why is that at that time, the USA dominated in the world economy on the one hand, and the former Soviet Union maintained its military super power under the Cold War on the other hand.
The beginning of the EC was regarded as small. However, its scale and influence in the world economy have been continuously expanded by the growing economic powers of major member states such as Germany and France as well as members of European Free Trade Association (EFTA) such as Denmark, Great Britain, Ireland. These EFTA member states became the EC member states in the 1970s.
Although the EC was enlarged by the EFTA member states, it seemed to loose its potential of economic growth in the 1980s due to the Japanese economic expansion on the world markets as well as the close economic ties of the USA with the Asian nations. Under these situations, the EC succeeded in enlarging new member states such as Greece, Portugal and Spain in 1982 and 1986 respectively. With these new member states, the EC took new chances to grow further.
Historic events emerged in the East European nations after the second half of the 1980s. With the new open policies of the former Soviet Unions’ President, Michael Gorvachov, reformation processes in the East European nations started and resulted in the end of the Cold War in the whole European continent. At the same time, national economic interests became the most important agenda after conflicts of the two ideologies between capitalism and communism.
Under these chaotic economic and political situations, the EC set a target to develop new firm relationships between the member states from an economic cooperation to a political cooperation that aims to build up a united Europe.
Certainly, there are many obstacles for the EC to achieve a unified Europe economically and politically. To be a united Europe, a creation of a common European currency, European Bank and unified defense and foreign policies are necessary. However, all of these issues are beyond the national power. In order to realize these issues, the EC became the European Union (EU) in 1995.
The EU was enlarged by entering new member states such as Austria, Finland, Sweden in 1995. From January 1 1999, the common European currency, ECU was launched and the European Central Bank will be build up in the near future.
A main goal of the EU is to maximize economic and political interests of the member states. The EU recognizes that the member states must be unified in order to protect their economic and political interests against Japan and the USA. Therefore, it is very natural and logical for the EU to unify its member states economically and politically.
2. Purposes and Goals of the Study
The purposes of the study are to investigate the processes of regional economic integration in Central and Eastern Europe as well as to discuss the prospects for the possible enlargement of the EU.
The goals of the study are to find answers about the following questions:
First, why do the member states of the EU intend to unify the Europe?
Second, how does the regional economic integration in Central and Eastern Europe have proceeded and which problems remain still there?
Third, how will the regional economic integration in the Central and Eastern Europe affect the EU economically and politically?
Fourth, in which direction will the EU be enlarged in the future?
3. Theoretical Background
An economic integration means that more than two nations located in a geographical proximity build a trade union for their mutual economic interests and at the same time, restrict non-member nations in a free trade zone. However, the union aims to enable not only a creation of the free trade zone, but also a free transfer of products, capitals and labors. After these endeavors, the union can build a regional economic community. At the final level, the union achieves a full economic integration that results in a political union.
Balassa defined the economic integration as five processes such as free trade zone, customs union, common market, economic union and full economic integration (political union). All processes have their own targets to meet goals. (Balassa; 1981) (see table 1)
Table 1: Five Processes of Economic Integration
Free Trade Zone / Customs Union / Common Market / Economic Union / Political UnionFree Customs Barrier / O / O / O / O / O
Common Customs Tariff / X / O / O / O / O
Free Transfer of Production Factors / X / X / O / O / O
Regulation of Economic Policies / X / X / X / O / O
Supreme National Organization / X / X / X / X / O
Source: Jong-Won Lee, A Study on the European Union, 1998
Note: O – necessary, X – not necessary
Balassa also said that an economic integration is a process as well as a state. Myurdal supported his theory. According to Myurdal’s statement, the economic integration is a realization of the old Western ideal of the equality and of the equal opportunity. (Myurdal; 1975)
II. The Process of the Economic Integration in the European Community (EC) and the Creation of the European Union (EU)
The EC was not so attractive for non-member states until the beginning of the 1980s. It seemed to loose its economic dynamics and to be unable to expose any visions for the future. At that time, the right explanation about the EC was that a glory of Western Europe might disappear in a history. In fact, however, the EC emerged as a powerful economic bloc during the past ten years. The reason why is that three new member states such as Greece, Portugal, Spain which were economically weak entered into the EC.
With the three new member states, the EC was able to expand its common market as well as to demonstrate its economic power in the world. Additionally, the EC developed continuously during the same period and became a cooperative common market based on high expectation for the future and economic growth, successive social policies and several treaties of environmental policies. At the same time, the EC made clear its final goal to approach to the European Single Market that all of the member states accepted in the Treaty of Rome in 1957. (Tolkdorf; 1993)
To become an economic union, the United States of America were a model for the United States of Europe in order to create new opportunities for economic development. The advantages of the USA the EC wanted to accept are as follows:
First, a unified economic market without boarder between states.
Second, free transfer of production factors within the common market.
Third, a single currency system within the common market
Fourth, a unified legal system in the USA
These are the main advantages for the US economy to become an economic superpower. In the case of Western Europe, however, small and medium sized territories are functioning as disadvantages to build an economic union. In fact, boarder controls between the member states, unstable currencies, strong nationalism, discrimination etc. were major obstacle for the EC to build a European Single Market. (Park; 1995)
In order to overcome these obstacles, the EC announced the Single European Act (SEA) in Hague in 1986. The SEA was accepted by the Luxembourg Summit of the member states in 1985 and aimed to support a creation of European Single Market legally. The EC planned to pass 282 new laws that could overcome physical, technical and fiscal barriers. (Lee; 1997)
Additionally, the EC announced to create the European Single Market started January 1 1993. Therefore, the Committee of the EC acting as the government of the EC was obliged to submit a report for the European Single Market until 1990. This aimed to harmonize existing legal systems of the member of states and supreme national powers of the EC that focused on no boarder controls as well as a unified economic market. (Spaeth; 1992) Consequently, the EC enabled to extend its economic interests to political interests that became a basis of the European Union (EU).
In relation to the European Single Market, the Committee of the EC let Paolo Cecchini research on effects of the European economic integration in 1988. According to the Cecchini Report, the European Single Market can bring the following outputs; 4.5% increase of GDP, 6% decrease of price and 2 million new jobs.
Later on, the Committee of the EU reported on the results of the European Single Market in 1996. The results from 1993 to 1994 were 1.5% increase of GDP, 1.5% decrease of price and 900,000 new jobs. (Lee; 1997)
In 1990, the leaders of the EC member states at Dublin Summit in Ireland agreed to establish the European Central Bank in order to upgrade the European Monetary Union (EMU). A formation of the EMU consists of the following three steps:
First, free transfer of capital within the EC member states.
Second, a creation of a common currency.
Third, building the European Central Bank.
Additionally, contents of the Treaty of Maastricht were discussed in the Dublin Summit. The Treaty of Maastricht was signed in 1991. It enabled free transfers of labors, goods and capitals within the member states. With the Treaty of Maastricht, the EC became a single market and changed its name as the European Union (EU).
The EU expanded further so that the three EFTA nations, such as Austria, Finland, Sweden joined the EU since January 1 1995.
III. Regional Economic Integration in Central and Eastern Europe
1. Economic Structures and Administrative Functions in Central and Eastern Europe
“Economic structures, the territory they cover and their administration are intimately interwoven.” (Bennett; 1989, p.3)
At present, the territorial and administrative structures within Central and East European countries are changing rapidly in respond to the fundamental economic and political transformation that has been occurring over the past ten years.
The administrative subdivision of Central and East European countries reflected strongly the aims and principles of communist ideology. In reality, centralized governments used the territorial units to implement its own aims such as some specific industrial development and a strategy of regional equality appropriate to socialism. The administrative subdivision also did not function as any real authority at lower levels so that this lost regional power. (Bachtler; 1992)
Due to the sluggish economic situation based on a central controlled economic system, many Central and East European countries carried out radical administrative reforms after 1960. Maurel explained these reforms as follows: Economic regionalization became the dominant object which, by means of territorial reform, central powers used to make the functional economic regions and administrative boundaries coincide. (Maurel; 1989)
Although the reforms were not successful from a political viewpoint, these significantly influenced on the national territorial structure as well as a spatial pattern of economic activity. Among Central and East European countries, there was a distinction between the countries with a more unitary character and those of a federal nature. The former was Poland, Hungary, Romania, Bulgaria and the former German Democratic Republic (GDR). The latter was Yugoslavia and Czechoslovakia. The latter two nations developed a federal constitutional system in order to avoid animosity and conflict that could result from ethnic groupings and territorial divisions. Therefore, the two nations created relatively autonomous regions mirrored the major ethnic divisions (Serbs, Croats, Slovenians, Bosnians, Macedonians, Montenegrins, Hungarians and Albanians) in Yugoslavia as well as (Czech and Slovak) in Czechoslovakia.
In fact, however, the radical pre-1989 reforms in Central and Eastern Europe may have been implemented within the scope of the communist system to serve the ideological and political goals.
2. Transformation Processes of Central and East European Countries.
Central and East European countries have been adopting a democratic political system and a free market economy as their national goals since 1989. At the same time, the administrative structures of these nations have been altered to reach their goals. Thus, it is safe to say that the reforms being designed now are of quite a different nature compared with the previous reforms.
The new reforms focus on decentralization of power and functions to lower administrative levels. Under the new economic conditions based on a transition to the free market economy, it is necessary to create an administrative structure that facilitate and encourage indigenous economic development. Additionally, lower levels of the administrative structure must be able to attract and stimulate economic growth independent of any national plan or central control. (Bachtler; 1992)
With the new reforms, annual output declines have been very large between 1989 and 1995. However, the output in 1995 increased slightly, and an economic growth began as early as 1994 in most of Central and Eastern European countries. Furthermore, the economic growth for 1996 was expected positive in all of Central and Eastern European countries. (see table 2) (Fischer et al; 1997)